You are permitted to invest in Residential and Commercial Property in superannuation but only in an SMSF. In relation to investing in Property for your SMSF, there are very specific rules and Regulations that must be adhered to and we strongly suggest that you familiarise yourself with them when contemplating purchasing Property for your SMSF.

Residential Property with Borrowings

Clients with an SMSF are permitted to invest in Australian Residential Property where the SMSF borrows to fund the Property Purchase. There are a number of lenders (Macquarie Bank, Bank of Melbourne/St George, Commonwealth Bank or Resimac Platinum) with a SMSF Loan Product.

Property Purchase must be in accordance with the SMSF Investment Strategy

As a Trustee you must ensure all investment decisions are made in accordance with the documented Investment Strategy of the SMSF. We recommend that when you purchase Property in your SMSF (whether you borrow or not) the purchase is documented detailing how the Property Investment conforms to the Investment Strategy of the SMSF.

Rental Income

The Rent from the Property Investment must be banked into the Transaction Bank Account established for your SMSF

Rental Expenses

The Expenses for the Property Investment must be paid from the Transaction Bank Account established for your SMSF.

Depreciation Schedule

Clients who have acquired a Residential or Commercial Property in their SMSF, particularly newer properties, are able to legally claim depreciable items including carpets, furniture, fittings and so on. To maximize the depreciation tax claim it is advisable to prepare a Tax Depreciation Schedule for your SMSF relating to the Property Purchase. Please note that the Tax Depreciation Schedule must be prepared by a Quantity Surveyor. A Tax Depreciation Schedule is simply a document that lists all the properties depreciable Items, their effective life and the dollar value you can claim against your SMSF Income. For example for a newer property, depreciation claims may be in the thousands of dollars annually. So for example if your annual depreciation claim was $5,000 you will save $750 in tax annually (ie $5,000 x 15%).

Avoid Audit Issues – Invest in the Right Name

Based on over 25 years of experience we have identified a number of instances where Property Investments have been incorrectly established in the incorrect account name resulting in ATO compliance issues. The owner of the Property will actually vary based on whether borrowings will be used to purchase the Property or not.

Transfer (or Sale) of Residential Property owned by a Member to a SMSF

A SMSF Member cannot transfer (or sell) an asset owned by that Member (or an associate of a Member including family members by blood or marriage or entities controlled by the Member) to the SMSF unless the transfer is specifically allowed by legislation. Residential Property is not specifically allowed to be transferred by legislation. This means that you cannot sell or transfer a Residential Property that a Member of the SMSF (or associate of that Member by blood or marriage) owns to your SMSF.

Transfer (or Sale) of a Commercial Property from a Member to a SMSF

As detailed above an SMSF Member cannot transfer an asset owned by that Member (or an associate of a Member including family members by blood or marriage or entities controlled by the Member) to the SMSF unless the transfer is specifically allowed by legislation. Business Real Property (ie property that is used wholly and exclusively in one or more businesses such as Commercial Property) is specifically allowed to be transferred from a Member (or an associate of a Member including family members by blood or marriage or entities controlled by the Member) to a SMSF at market value. However you will need to consider Capital Gains Tax and Stamp Duty Implications prior to making this transfer.

Investment in the Family Home

It is expressly forbidden for a SMSF to invest in the Family Home of a Member (or an associate of a Member including family members by blood or marriage or entities controlled by the Member) irrespective of whether commercial rental is paid.

Investment in a Holiday Home

It is expressly forbidden for a SMSF to invest in a Holiday Home used periodically by a Member (or an associate of a Member including family members by blood or marriage or entities controlled by the Member) irrespective of whether commercial rental is paid.

Investing in Overseas Property

We don’t recommend that our clients buy overseas property within a SMSF. The rationale for disallowing overseas property investments is that overseas countries in most instances will not recognise the SMSF as the purchaser of the property. This means that the property is invariably purchased by clients in their personal names with SMSF monies. This is tantamount to a super withdrawal and using the monies to acquire the asset in the Trustees personal name. The ATO would not accept that the owner of the asset is the SMSF in this case and where the monies accessed were preserved, the SMSF would be severely penalised for illegal access of super benefits. Other reasons for disallowing overseas property is the difficulty in ascertaining who is tenanting the property as well as the additional complexity in converting rent and expenses from the overseas currency to Australian currency. This added level of complexity is outside the scope of our low cost model offering.

Residential Property must be rented to third parties unrelated to Members

Residential Property acquired by a SMSF must be rented out to third parties unrelated to you. This means you cannot rent a property to family including parents, siblings, children or your spouse. You can however rent the property out to unrelated friends.

Commercial Property can be rented to any party on commercial terms

Commercial Property acquired by a SMSF (ie Property that is used wholly and exclusively in one or more businesses) can be rented out to any party including to you or an entity associated to you to the extent that commercial rental is paid.

Investing all SMSF Monies in Property

There is no specific prohibition to investing 100% of your Super Benefit in one asset class such as Property. Where such a strategy is adopted, you should clearly define why this is an appropriate strategy for your SMSF and how it conforms to the SMSF Investment Strategy. It is important to remember that risk and diversification are important considerations when implementing your SMSF Investment Strategy. A “one asset” strategy may be considered as increasing your SMSFs Risk Profile and may not be adequately diversified to mitigate Investment Risk. So while this strategy is not specifically prohibited you must carefully detail why it is appropriate for your SMSF if it is adopted. Importantly an Investment Minute detailing the rationale for the investment and how it conforms with the SMSF Investment Strategy should be executed at all times. We don’t recommend this strategy to our clients though.

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Kofkin Bond & Co, is a privately owned financial services, wealth management and estate planning firm that employs and partners with specialists, to look after the private wealth of families and small business owners.